Hey Bigger Pockets Crew!
A property in Chicago came across my desk and is primed to be my next target for an investment property. I want to invest in this property with peers to spread the risk/pool our money. I plan to pool our money to be able to put 25% down on the property. % ownership of the property would be divided up by % of the down payment they contributed. We would share managing the property. With that said, what do I need to do to get this started? What are thoughts on this idea?
I assume all investor's names will go on the loan. Do we need to open an LLC? Do we need to open a business account? Any advice would be helpful! Thanks!
This shouldn't replace legal advise. So, talk to a lawyer. That being said. The biggest mistake investors make when putting together something like this is not complying with syndication law. If any of the investors are passive, then it's a security and the SEC has rules on what's legally allowed. The rules that govern whether something is a security or not is a threefold test. The three criteria for a security are: 1) An investment of money, 2) where the investor is expecting a profit, 3) from the efforts of a third-party. If it's something where everyone is actively participating together, then that's not a security.
If you do have a security, you need to make sure you are careful that you follow the rules. I'd be happy to connect with you if it's a security and help you with some advise on how to learn more and proceed in a way that's not going to get you or your investors in trouble.
You will want an LLC for sure with this.
I am a syndication attorney so here are my thoughts. Sounds like you intend to make all your investors managers of this property and contribute money. If they are truly active and one of you is not taking the management roll and getting compensated for that, you may be OK SO LONG AS, you dont have many partners (i would call them partners not investors). Once you get to about 5, it will be harder and harder to show that they are all actively pariticaping and inevitably one of you will be doing most of the work and generating the profit which the other one takes more of a passive roll. This is where you cross the line and get into the world of securities.
You def want an LLC and most likely some sort of a JV Agreement in addition to a well drafted operating agreement.
hope this helps.
I second Maurico's advice. If everyone who is investing in the deal has a defined ongoing role, you can do a JV rather than a syndication, which will save you a lot of money.
You already received an excellent advice from @Mauricio Rauld . So essentially, as long each of your (up to four) partners have some sort of active role in your partnership, even a small one, you can partner up with them via JV (joint venture.)
At the end of the end, always consult with an attorney.
I would be very concerned about trying to make this work without the SEC registration. Assume you start out well and everyone is an equal partner, they are showing up for meetings and actively voting on all major decisions. Then some sort of life event happens. They drop the ball and start behaving as a passive investor. The original intention was fine and now the 'team' is drifting in a bad direction.
Given you want to split the ownership by the % contributed, you are very likely to have 'partners' who are not equal. Further reason to think this will go bad if you are depending on a judge believing everyone contributed.
It's best you advice with a legal professional. You are doing the right thing asking these types of questions. @Mauricio Rauld has experience with these types of situations and has the professional experience.